Target Corp.’s surprise decision to shutter all of its Canadian stores and file for creditor protection will leave a massive footprint of vacant space in shopping centres across the country, and industry officials say there is no obvious suitor set to fill the void.
With nearly 15 million square feet of retail space and five million square feet of office and industrial warehouse space across Canada, the U.S. discount retailer’s decision to shutter its Canadian operations less than two years after its bold entrance into the country has plunged the commercial real estate industry into uncertainty.
Some predicted that several stores may have to be demolished, others carved into several smaller locations and some, particularly in Western Canada, may struggle to find any tenants amid the turmoil of sinking oil prices.
The news came as a shock to most of Target’s approximately 20 landlords, many of whom say they expected the company to close some underperforming stores, but expand others in key markets.
The company had only opened its new flagship store at Toronto’s stockyards development in March and announced plans to build a new location in the city’s downtown, one of seven new stores planned for Canada.
“I don’t think any one of us suspected that it would be this way,” said Rai Sahi, chairman and chief executive officer of Morguard Corp., a commercial landlord that had leased 15 locations to Target, representing 2 per cent of its total revenue.
“Every time something like this happens in the industry, it’s a well-known fact that in the short term, there is negative impact, not only on the market but also on the mood,” said Dori Segal, chairman of First Capital Realty, which leased two stores to Target.
Analysts and landlords speculated that potential local suitors include Wal-Mart and Canadian Tire, although in some cases those retailers already have existing stores close to Target locations and could either use the opportunity to move to a better space or use it as leverage to renegotiate better deals with their existing landlords, said Alex Arifuzzaman of retail consultant Interstratics Consultants Ltd. American home improvement retailer Lowes Companies Inc., which has been trying to expand in Canada since withdrawing its bid to acquire Rona Inc. in 2012, may also be interested in some Target locations. But few expected a single retailer, either Canadian or international, would be interested in taking over all 133 Target locations.
The most coveted sites in urban areas and major suburbs might go quickly, but landlords in smaller markets will be struggling to find a retailer willing to jump into Target’s massive footprint, with stores ranging from 80,000 to 125,000 square feet. “In the current market situation I would be surprised if there were many locations that would have numerous bidders,” said Jeff Berkowitz of retail broker Aurora Realty Consultants Inc. “It’s just not a time where you have that many players.”
As an anchor tenant in many malls, Target inherited leases from Zellers that already came with rents well below market prices, averaging $6 to $7 a square foot, compared to going rates close to $20. For some landlords, that may make it easier to negotiate a competitive deal with a major retailer willing to take over an entire location. Otherwise, landlords say they will have to carve them up into smaller stores. Brian Kriter, senior managing director at retail broker Cushman Wakefield, predicted some locations may be demolished to make way for several small stores, which would be a cheaper alternative to leaving a store vacant for months to search for another major tenant and allow landlords to charge higher rents.
Some landlords say Target’s collapse is an opportunity to refresh their portfolios. Many see Target as just the latest in a long line of retailers, such as Sears, Eaton and Woolworths, that have failed in Canada. “I sense an opportunity to grow our revenues by putting in some smaller tenant and box stores,” said Patrick Sullivan, chief operating officer of Primaris, a division of H&R REIT, which leased nine locations to Target. “But it’s a sad day for Canada when such a significant retailer [shuts down].”
Others worry whether Target’s catastrophic demise in Canada is sending a message to retailers across the globe to avoid Canada like the plague. “What does this say to American or international retailers that have been considering a potential entry into Canada?” Mr. Berkowitz said. “Does this close the door for them completely on Canada as an expansion market because of the failure of Target to make a go of it? In the cautious climate that we’re in right now, it is definitely going to have an impact.”
TAMSIN MCMAHON – REAL ESTATE REPORTER
The Globe and Mail
Published Thursday, Jan. 15 2015, 7:20 PM EST
Last updated Friday, Jan. 16 2015, 5:47 PM EST